Direct yen-yuan trade begins on June 1st in Shanghai

China and Japan will launch direct yen-yuan trade in Shanghai and Tokyo beginning on Friday to facilitate trade and financial transactions between Asia’s two biggest economies.

The yen is the second foreign currency to be directly traded with the yuan after the US dollar, marking another step in the globalization of the Chinese currency. Previously, the yuan/yen exchange rate was based on the yuan/dollar mid-point rate and dollar/yen rate.

The step follows an agreement between the leaders of the two countries in December to promote direct trading of their currencies without using the US dollar to set exchange rates.

“Developing direct yuan/yen trading will help reduce trading costs for businesses and help strengthen financial cooperation between the two countries,” the People’s Bank of China said in a statement today.

Lian Ping, a chief economist with the Bank of Communications, said the move will facilitate trading and investment between China and Japan, and will improve China’s exchange rate system.

But he warned the yuan/yen rate could be more volatile in the future and that companies and banks should increase risk management.

Economists estimated the move could save a total of US$3 billion in handling fees a year for yuan and yen exchanges.